How to calculate capital gain for Tax return if I have sold property last financial year?

Many of our customers are calling or writing us and asking us how to file taxes if I they have sold property in last financial year.

Income Tax Act allows exemption in the capital gain from sale of house property if Assessee invests gain from property in a residential house property within 2 years from the date of sale or get house constructed within 3 years from the date of your property sale.

It means, you are not allowed to invest or put gains in a commercial property or land to save tax. You are required to buy a residential property only. If you buy a property which is under construction, then a two-year period is further enhanced to 3 years, caveat you should not own more than 1 house.

Which ITR form to be filed if I have sold property last financial year

If you have sold property, you are requiring filing ITR-2. Scenario’s where you should be filing ITR-2.

    1. Income from salary/pension
    2. Income from house property(s)
    3. Income from other sources (excluding winnings from lottery and income from races horses)
    4. Income from Capital Gains
    5. Income from foreign assets

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Learn now how to calculate long term capital gains on sale of house property

When it comes calculate long term capital gains on sale of house property, many assessee calculate the Selling price Minus the Purchase price to calculate profit and loss on house property to calculate the capital gains tax.

What it means for example: Suppose an assessee bought a property for Rupees 50 lakh in January 2000 and sell the property in October 2015 for a price of Rupees1 Crore. Many assesse assume that capital gain on the sale of property would be 50 lakh (selling price - purchase price).

Actually the capital gain tax calculation above is not correct. You are required to factor in cost inflation indexation in India, which will help you reduce taxable capital gain liability.

What is cost inflation index India

One acceptable fact about money these days is that the value of the money decreases every year due to inflation. Department of income tax in India allows indexing the cost price, so as to arrive at a price that is comparable, to the sale price, when you sell your property. This price is referred to as the Indexed Cost of Acquisition.

Formula to find the indexation factor:

Indexation Factor = cost inflation index India of the year of sale / cost inflation index India of the year of purchase.

Example: Suppose you purchased a house in November 1995 for Rupees 35 lakh and decide to sell it for Rupees 105 lakh in October 2010.

Let's calculate the capital gain tax on such a transaction by applying the cost inflation index.

1. We need to find the cost inflation index for the year of the sale. Using the cost inflation index chart table provided, we can see that the cost inflation index for the year 2010 when you want to sell is 711

2. The cost inflation index India for the year 1995, when you purchased the property is 281. So using the formula, Indexation Factor = Cost inflation index of the year of sale / Cost inflation index of the year of purchase: Indexation Factor = 711 / 281 = 2.53024

This means that the prices have increased around 2.5 times between the years 1995 and 2010. To clarify further, what you bought for 35 lakh in 1995 would cost 2.5 times more in 2010 due to inflation reducing the value of money.

Once you have calculated the indexation factor, you can calculate the indexed cost of your acquisition. This is done by multiplying the actual sale price by the indexation factor.

Formulae: Indexed Cost of Acquisition = Actual Purchase Price * multiplied by the Indexation Factor. So your Indexed cost of acquisition when applying this formula works out to 35 lakh * 2.53024 = 88.56 lakh. The actual capital gain tax that would apply for your property sale can now be calculated.

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Long term capital gain calculator

Long term capital gain is the difference between the sale price and the indexed cost of your acquisition.

Long term capital gain calculator Formula: Long Term Capital Gain = Sale Price - Indexed Cost of Acquisition.

Using the amounts from our example: Long Term Capital Gain = Rupees 105 Lakh - Rupees 88.56 Lakh = Rupees 16.44 Lakh. So the capital gain that seemed to be Rs. 70 lakh is actually only Rupees 16.44 lakh.

This can even be further reduced, when you add all the expenses for your property upgrades, maintenance etc. and apply indexing to those figures also.

Suppose Rupees 6.44 lakh was spent in making improvements to the property after you bought it in 1995. Then your final figure is trimmed down to a capital gain of 10 lakh. Considering a 20% capital gain tax rate, you would have to pay just 2 lakh.

Cost inflation index for prior years: The benefit of indexation can be availed, either from the year of acquisition of the property by the assesse, or from the base year 1981-82, whichever is later. The financial year in India is from April to March. When reading the cost inflation index chart, the month of purchase needs to be taken into consideration.

The latest cost of inflation index chart is available below


How to save tax on sold property?

Invest in capital gain bonds - There are instruments like capital gain bonds, in which the profit arising from the sale of a property can be invested. These have a lock-in period of three years and the maximum limit for investing in such instruments is Rs 50 lakhs. These bonds are currently being issued by NHAI and REC. If the entire amount of long-term capital gains is invested in these bonds, the tax is fully exempted. Investments of any lesser amount will grant a proportional deduction. The money can be withdrawn after three years

Invest in Another Property – Now, if a property has not been identified and purchased before the return has been filed or before the due date for filing the tax return, whichever comes earlier, the money has to be deposited in a special account known as the Capital Gain Account Scheme (CGAS). Doing this conveys to the authorities that you intend to buy a property to save the capital gains tax. Any withdrawal from CGAS should only be for payments to be made in relation to the purchase of the new property.

There are two types of accounts in the CGAS provision. The first account is like a savings deposit account. Withdrawals may be made from the account from time to time subject to other conditions of the scheme. This account is suitable for people who are planning to construct a house over a period of time. The amount withdrawn should be used for the purpose of purchase or construction of a house. It should be used for the purpose within 60 days of the withdrawal. Any unused amount should be deposited back in the same account.

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